High Court takes glimpse into murky world of tax avoidance

A GLIMPSE INTO the ways in which the wealthy avoid tax even when in receipt of massive income was on display in the High Court in Dublin this week.

The court heard that as part of a tax avoidance scheme aimed at lowering the tax bill of at least 26 Irish millionaires, a London asset management company called Schroder organised a scheme whereby millions of euro worth of “losses” were artificially devised for tax purposes so as to reduce real and very significant capital gains tax bills.

The total potential loss to the Exchequer is estimated by the Revenue to be in the region of €110 million and arises from capital gains profits of €550 million made by the 26 people, or an average of €21.15 million each.

Counsel for the businessmen, Michael Collins SC, said the essence of the scheme was very simple. “The artificiality of it was obvious. It met the duck test.”

The latter was a reference to a comment by former Revenue Commissioner Michael O’Grady at a conference in January 2011, where he said the best way of spotting a tax avoidance scheme was the “duck test”. If it looked like tax avoidance it probably was.

In the case of Cork businessman John Punch, Irish government gilts were bought from the Royal Bank of Scotland for €10.7 million, sold to Schroder for €20.39 million (a price that bore no relation to market value), and then sold back to Royal Bank of Scotland for €10.79 million, all on the same day. The transactions resulted in a gain of €9.6 million for Mr Punch.

Meanwhile, Mr Punch also engaged in a foreign exchange transaction that resulted in a loss of €9.7 million. These transactions were organised by Schroder in London.

Gains on investments in Government gilts are not taxed and so the gain made on the gilts did not form part of the resulting tax computation. This meant that, in return for a real loss of €100,000, Mr Punch had managed to generate a €9.5 million tax loss that could be used when computing his capital gains tax bill.

In the year in question Mr Punch had received a €6.4 million capital distribution from a company, Ballycurreen Cross Holdings, which he owned with his cousin, Martin Punch. “The transaction was mainly aimed at avoiding tax on this,” Mr Collins said.

John Punch created an entitlement that the Revenue calculated would have reduced his capital gains tax bill for that year by €2.15 million. It would also have benefitted him to the tune of €54,000 in taxes saved in subsequent years.

Mr Collins said the transactions that lay behind the tax scheme were linked to the the Euro Stoxx 50 index of top euro zone shares.

If shifts in share prices stayed within certain bounds, then the scheme worked. If they didn’t, then the amount of money lost by Mr Punch would remain the same, though the tax effects would be different.

The Revenue is challenging the scheme under Section 811 of the Taxes Consolidation Act, 1997, which allows it to deny the tax advantages of transactions that it can show are tax avoidance as defined in the act.

The four businessmen challenging the ruling are arguing that the Revenue did not inform them immediately of their view in relation to the scheme, as required to under the act, but rather delayed notifying them of the decision for a lengthy period. The Revenue is contesting the claim.

The Revenue first became concerned about the transactions in 2009 when the individuals made tax returns showing very substantial gains but claiming losses for tax purposes.

According to Revenue official Breda Ruddle, who led the investigation into the scheme, the effort to understand what was going on required the engagement of experts and consultations with the National Asset Management Agency and people from the Smurfit School of Business.

“We never got to the point where we fully understood the transactions,” she said.

However, on July 22nd, 2011, John Punch was told of that the Revenue consider the scheme to fall foul of Section 811. On July 27th, Martin Punch was told. On August 16th Derek Whelan was told and on August 24th Ronan McNamee was told.

While most of the details contained in the Revenue’s reports on the four individuals were not declared orally in court (the details were in documents that formed part of the plaintiffs’ case), it was disclosed that the tax advantage that was being refused to Mr McNamee was €5.1 million and that the capital gains tax due from him in the year in question was €11.2 million.

Six of the 26 people known by the Revenue to have been involved in Schroder schemes used the tax treatment of Government gilts as part of their strategy, while the rest of the people involved used contracts for difference.

Concern about the scheme led to changes in the law introduced in the 2010 Finance Act at the behest of the Revenue.

The court heard that the same tax agent was used for the people using the gilt purchases as part of their tax avoidance strategy and that all 26 people provided identical letters from the same solicitor in correspondence with the Revenue.

The court heard that Mr Punch’s tax agent in his dealings with the Revenue was Twomey Moran. The tax consultancy firm is based on Barrow Street, Dublin 4.

The four men have taken Judicial Review proceedings of the Revenue’s decision.

The men have more scope to appeal the Revenue’s refusal of the tax scheme in the High Court than by way of the Appeal Commissioners.

However, as a consequence the case is being heard in open court rather than in in camera proceedings.

Neither side has to date given copies of any of the documents involved in the case to reporters, as is the norm with most cases in the High Court.

This was brought to the attention of the court registrar by The Irish Times during a break for lunch on Wednesday.

When the hearing resumed Mr Justice McGovern asked the parties involved to attempt to facilitate the media in its coverage of the case while bearing in mind any sensitivities that might be involved.

As of yesterday, no affidavits or other documents referred to and opened in court, had been given to the media.

Multi-million euro legal battle: The men behind the High Court case

John and Martin Punch are cousins and belong to the Cork family who owned the shoe polish and cleaning products business, Punch Industries, that was founded more than 160 years ago.

In 2006, the cousins sold the business to a pan-European cleaning products company called the Spotless Group, for an undisclosed price.

However, the family remained owners of property linked to the successful business.

Records in the Companies Office show that a holding company owned by the two men, Ballycurreen Cross Holdings, was placed in voluntary liquidation in January 2009.

John Punch (49), of Cobh, Co Cork, and Martin Punch (58), of Glanmire, Co Cork, were the company’s directors.

A document filed by liquidator Michael McAteer in the Companies Office shows disbursements from the company totalling €57,839,909 in the period February to December 2009. The money was issued in irregular but even payments to the two cousins.

Ronan McNamee (60), of Dartry, Dublin 6, is a food technologist who has been involved in the bakery sector for more than 30 years.

He is best known as co-founder of Cuisine de France, which he and his business colleague Pat Loughrey sold in 1997 for £63 million.

More recently, he has launched the BFree range of wheat- and gluten-free breads.

Mr McNamee and his wife, Jacqueline, are directors of a number of property investment and other property companies, according to records in the Companies Office.

Some of these companies are dependent on the support of Mr McNamee and his bankers in order to continue as a going concern, according to the most recently filed accounts.

The accounts of Triuc Developments Ltd, which has an interest in property in the Cookstown Industrial Estate, Tallaght, Dublin, show that Anglo Irish Bank holds a personal guarantee from Mr McNamee to the amount of €8.55 million.

Records in the Registry of Deeds show the couple own 23 Grafton Street, 51 a and b Dawson Street, a number of units in the Creation Arcade, Grafton Street, and 24 Duke Street, all in Dublin. Mr McNamee transferred his interest in a house on Temple Road, Dartry, to his wife in January 2010, subject to his right of residence. Mr McNamee and Anthony Kidney SC also own property in the Woodford Business Park, Santry. Mr McNamee has mortgages on these properties with Anglo Irish Bank and the Bank of Ireland.

Derek Whelan (56), with an address in Foxrock, Dublin, is a director of Harold Properties Ltd, a property investment company which had shareholders’ funds of slightly in excess of €2 million at the end of September 2011.

He was formerly a director and majority shareholder of Harold Holdings Ltd, a company that in turn owned Harold Engineering Ltd, which is involved in the distribution and after-sales service of machinery.

Harold Holdings was sold in May 2007. The previous year it had capital and reserves of €1.28 million and had produced a profit of €580,658. The sale price for the company is not known.